The Bank of England stunned the city today as it cut interest rates by 1.5% to 3%.
The cut, the biggest since 1981 leaves rates at their lowest level since 1955, and exceeded the 1% reduction called for by the CBI.
It seems that concerns over the economy are now outweighing those about inflation at the Bank, as the Monetary Policy Committee said that over the past two months there has been a “substantial downward shift in the prospects for inflation in the U K” and “a very marked deterioration in the outlook for economic activity at home and abroad”.
Borrowers who are on tracker deals should see the benefit from December - a £150,000 repayment mortgage over 20 years, tracking the Bank Base Rate (BBR) at +0.5% will reduce by £120 per month.
However, with rapidly reducing rates, the prospect of a collar being reached is more likely. A collar is a minimum rate, which if reached, prevents the borrower from benefiting from further cuts in BBR. As not all lenders apply a collar, or even apply them across all deals, borrowers should check their existing mortgage offer, or speak to their lender to see if it applies to them.
Following the 0.5% reduction in BBR last month, the majority of lenders did not pass on the full cut, so for borrowers on their lender's SVR, or linked to it through a discounted deal, the prospects are less clear, but we will have to wait and see how lenders react.
Borrowers looking for a new tracker deal need to act fast. Many lenders are increasing the margins at which their deals track over base rate, with some taking the further step of withdrawing all trackers completely.